If the benchmark rate were cut to less than zero, from the current 0.1 percent, commercial banks would have to pay the Bank of England to hold deposits for them. Policy makers have previously indicated that they were willing to consider negative interest rates amid the economic pressures caused by the COVID-19 pandemic.
A negative interest rate would encourage banks to lend money out rather than leave it at the Bank of England. A negative interest rate could theoretically result in savers being charged to hold deposits in their bank accounts, but commercial considerations, such as the need to attract deposits, might prevent banks from passing on all their costs to customers.
The central bank, in a letter dated Monday, asked the CEOs of commercial banks to provide information on their operational readiness for negative interest rates and challenges presented by such a move.
“For a negative Bank Rate to be effective as a policy tool, the financial sector—as the key transmission mechanism of monetary policy—would need to be operationally ready to implement it in a way that does not adversely affect the safety and soundness of firms,” Deputy Governor Sam Woods said in the letter.
Although negative rates are unusual, the Bank of England wouldn’t be the first central bank to cut rates below zero. The European Central Bank and the Bank of Japan, among others, have cut key interest rates below zero.
By Danica Kirka